Pandora Jewelry Outlet

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Oriental Watch Holdings Ltd OTCMKTS

Oriental Watch trades at 0.47 times P/NCAV. Even if operating leases are included as imputed debt, the company is valued below net current asset value.

Significant insider holdings and a dividend payment track record spanning 20 years suggest strong alignment of interests between insiders and minority shareholders. It is a net net trading at 0.47 times P/NCAV (price to net current asset value) and 0.37 times P/B. Oriental Watch is also trading close to its 52 week low at HK$1.45 as of January 8, 2015, after its share price declined by almost 31% in the past year. Weak consumer sentiment, particularly in the luxury segment, has resulted in Oriental Watch's half year net profit after tax to nearly halve from HK$19.8 million in the first half of fiscal 2014 (year ended March) to HK$11.0 million in the first half of fiscal 2015.

Company DescriptionStarted in 1961, Oriental Watch is a luxury watch retailer operating 14 retail shops in Hong Kong and 78 point of sales in China, Macau and Taiwan, as of September 30, 2014. For the first six months of fiscal 2015, it generated approximately 70% of its revenue from Hong Kong, with China, Macau and Taiwan contributing the remaining sales. Oriental Watch carries more than 100 prestigious luxury watch brands such as Rolex, Tudor, Piaget, Longines and Omega.

Net Current Asset Valuation AnalysisOriental Watch is cheaply valued at 0.47 times P/NCAV and 0.37 times P/B. More importantly, the quality of its current assets is high pandora clips-sterling silver clearance and it has minimal debt, excluding operating leases.

Approximately 93% of Oriental Watch's net current asset value of HK$2,378 million comprises of 'cash like' assets such as cash and bank balances (HK$451 million), and liquid inventories of luxury watches (HK$1,770 million). Based on a Daiwa Securities research report Cheap Pandora Charms published in January 2014, the Rolex brand accounts for approximately two thirds of Oriental Watch's sales. Rolex has strong brand equity and the market values of its branded watches tend to be relatively stable. According to the World Watch Report 2013 study, Rolex was ranked as the second most popular watch brand in China. A sell side analyst from Cinda International also wrote in a 2011 report that Rolex 'only increases production volume by 10% each year to keep the brand premium, and avoid over supply in the market and dragging down prices.' As a result, I have confidence in the quality of Oriental Watch's current assets and their valuation on the books.

To stress test Oriental Watch's net current asset valuation, I include its operating leases as debt. I arrive at the imputed debt balance of HK$888 million, by multiplying the annual rental expense by a capitalization rate of 4, and assuming annualized rental expense of HK$222 million. The capitalization rate or multiplier of 4 is calculated using the formula [1/(cost of Cheap Pandora Charms debt + 1/Asset Life], assuming 5% cost of debt and average asset life or lease term of five years. In fiscal 2015, Oriental Watch's leases were negotiated for an average term of 1 to 10 years, while interest costs as a percentage of debt was approximately 5%. This gives me an adjusted or stress tested net current asset value of HK$889 million for Oriental Watch, implying an adjusted P/NCAV of 0.93, which is still cheap in my opinion.

Alignment Of InterestsThere is an alignment of interests between insiders and minority shareholders, given the substantial insider holdings and Oriental Watch's dividend payment track record.

Oriental Watch's directors hold approximately 32.76% of the shares in the Company, with founder and Chairman Dr. Yeung Ming Biu having a 27.30% interest in Oriental Watch. As an owner operator, Dr. Yeung is more likely to take a long term view of the business and act in the interests of all shareholders. In addition, Oriental Watch's long history of dividend payments is another strong indication of the alignment of interests between insiders and minority shareholders. Oriental Watch has paid out dividends in every single year since fiscal 1994. It omitted its interim dividend for the first time in two decades in the first half of fiscal 2015, but distributed a special pandora bracelets kays jewelry for sale dividend of 0.5 HK cent per share, compared with an interim dividend 0.75 HK cent Cheap Pandora Charms per share in the prior year.

Long Term Growth Story Intact Despite Short Term HeadwindsOriental Watch is suffering from the continued weakness in the luxury retailing industry. In 2013, the growth rate of China's luxury market declined from 7% in 2012 to 2% in 2013, based on research by Bain. In the first nine months of 2014, the value of sales of jewelry, watches and clocks, and valuable gifts in Hong Kong fell by 14.7% year on year, according to statistics released by the Hong Kong's Census and Statistics Department. While I can't predict short term trends for the Chinese luxury market, the long term growth story remains promising. China is currently the world's fifth largest luxury market, but Deloitte expects China to jump to second position in the global rankings by 2018, as its middle income population grows.

Potential CatalystIn fiscal 2013, Oriental Watch disposed of one of its self owned retail shops for a net gain of HK$76 million, and indicated that it 'may consider divesting 4 other potential shop premises at opportune times to achieve greater shareholder returns in the long run.' As of September 30, 2014, the carrying amount of Oriental Watch's property, plant and equipment is approximately HK$259 million. In comparison, management estimates that these self owned properties should be worth approximately HK$532 million. Any future disposal of such properties at substantial gains should lead to a re rating of Oriental Watch's stock price, especially if such disposal gains are paid out as special dividends to shareholders.

Variant ViewOne obvious risk is that the luxury market could do even more badly, before it gets any better. Another risk relates to the significant dilution of existing shareholders' interests in the future. As of September 30, 2014, there are 54.56 million share options outstanding, compared with 570.61 million shares outstanding. This is mitigated by two factors. Firstly, the exercise prices for the share options between HK$3 and HK$4 are significantly higher than the current market price. Secondly, other employees (non directors) hold approximately 35% of the share options outstanding, implying that management does not monopolize options issuance and employees are properly incentivized and motivated.